Posted by July 15, 2008
An investment bank analyst published a report about a week ago suggesting that the two public / private housing finance giants, Fannie Mae and Freddie Mac, will each need about $30 billion of additional capital in order to comply with new accounting standards for how to consolidate assets. Once investors start to think about this, the stock prices of Fannie and Freddie fall like stones. The market capitalization of Freddie Mac is now about $3.5 billion. That means that theoretically, if an investor wanted to, they could buy all of the stock for each company, each of which has trillions of dollars in outstanding mortgage guaranties, for “only” $3.5 billion. Their “market capitalization” (number of outstanding shares times share price) is down about 80% over the past four weeks. With Fannie and Freddie in trouble, what do you think is happening to Lehman Brothers? You guessed it, their stock price continues to head south. Although Lehman’s share price was up 8% today, it’s closing price of $13.50 a share is just below half the price of their recent equity issuance at $28.00 a share. At least Lehman is outperforming someone . . . Fannie and Freddie!
Despite the seemingly unending negative headlines, I think the Fed and the Treasury, especially the Treasury, deserve kudos for being pro-active in dealing with the financial crisis. (Maybe the Fed should have / could have seen that subprime mortgage bubble, but that’s another story). To their credit, Treasury is now talking about supporting Fannie and Freddie by either buying their stock or lending them a pile of money or both which should stabilize the housing market.
July 21, 2008
Treasury’s talk of support for Fannie and Freddie has stabilized their respective stock prices. People were freaking out when the price of these stocks lost started declining precipitously. At one point each lost about half its value over a three day-period. Treasury Secretary Henry Paulson’s rhetoric now includes the word “bazooka”, as in he’s requesting that Congress give him a bazooka to attack the crisis and prevent a “run” away from Fannie and Freddie in the debt markets. It looks like Congress will give Mr. Paulson the bazooka too, with the caveat that any federal spending on Fannie and Freddie would have to be included in the debt ceiling limit calculations. The bill that contains this legislation may also have a provision to help people stay in their homes by transferring their defaulted mortgages to a federal agency, presumably at a steep discount. At the risk of ironic understatement, the bazooka development should be interesting.
Conditions in financial markets have calmed recently but remain tenuous. Oil prices were as high as ~$145 / barrel about two weeks ago, now they’re down to ~ $130 / barrel which has people outside of the oil business feeling better. Merrill Lynch tried to head off some tension by releasing their earnings one week earlier than usual last week which included a whopping $10 billion write-down in the value of certain assets. You know what they say: $10 billion here, $20 billion there; it all starts to add up after a while. This being the storied Merrill Lynch however, they had some tricks up their sleeve. They were able to sell their minority interest in the Bloomberg media company for $4.5 billion and they received tax credits on the big write-off. So, all-in-all, it doesn’t seem that bad, at least that’s what the market is thinking. Merrill’s stock price has been flat lately. For better or worse, all of the market’s “who’s next?” attention now seems squarely focused on Lehman.
I think I’m in a reasonably good spot at work but my specific area looks like it’s headed for an inflection point and the early signs are not positive. One of my compatriots did leave to go back to the Markets Group and another peer has effectively gone back to the Legal Group. There is a real risk that they’ll break up my group soon, even though the Fed still has outstanding loans to non-bank dealers made via the temporary, Primary Dealer Credit Facility (PDCF).
July 22, 2008
There was a fairly dramatic “give back” of the recent positive price action in both Lehman and Merrill today, which were down 10% and 15%, respectively. Continuing the trend that it’s better to be a troubled dealer than a troubled Government Sponsored Enterprise, both Fannie and Freddie fared worse, each down about 20% on the day. Despite the sharp price action, all of these stocks are trading above their 52-week low price, so I’m thinking: so far, so good. No banks have been put into liquidation over the past two weeks, so that’s good too. However, a couple of large regional banks seem to under considerable pressure, namely National City Bank (based in Cleveland) and Washington Mutual (based in Seattle).
My personal work situation seems to be deteriorating. We probably won’t be getting any more people, maybe the handwriting is on the wall? I can’t help but wonder if I will have any options but to return to the “salt mine” that is Domestic Capital Markets on the New York Fed’s trading desk, perhaps I’ll get an offer from Bank Supervision? Another way to go might be to try and stay with the Primary Dealer Credit Facility and work for the bank’s credit risk management area? Once again, I comfort myself with the knowledge that I’m still working, the Fed almost never lays off people and no one thinks the Fed’s going out of business any time soon.
Attending the tri-party working group meetings have become the most interesting thing that I do. That platform has some issues! It seems that God has looked down upon the Earth and decided that he / she does not like tri-party repo. I just found out about a new problem: how should a repo custodian effectively interact with the securities industry guarantor, SIPIC, in a bankruptcy proceeding as SIPIC has some power over asset transfers that can screw up the liquidation process. Yuck. Of course, that might pale in comparison to these other two issues that we’re working on: what to do about clearing banks potentially refusing to unwind collateralized trades to protect their credit position and thus literally starting a “run” on a specific dealer’s funding; and some secured lenders apparently have lent money against collateral that they may not be legally permitted to own should the tri-party trade not unwind. Yikes!
July 29, 2008
My career is officially in neutral. I may actually be a withering vine (“hey, was it cold last night, or what?”) as it looks like the little group I’m in will be dismantled. I better start working on Plan B for my employment situation, ASAP. It’s super ironic that I actually feel so “out of the loop” when there is SO much going on here. The Fed made three facility change announcements today and they’re always a big deal. The Fed announced: 1) an extension of the life of the TSLF and PDCF facilities, both of which will now remain open until at least January 30, 2009; 2) the Fed’s Term Auction Facility would now offer loans with an 84-day term; and 3) a new product that will auction options to use the Term Secured Lending Facility around quarter-end dates to primary dealers. That latter one is creative, while the first two are just acknowledgements that the financial crisis is continuing unabated.
A lot is going on in the private sector, too. Merrill Lynch continues to try and improve its balance sheet. They sold about $8.0 billion of common stock yesterday and announced the sale of $30 billion par of super senior Collateralized Debt Obligations (CDOs). It’s all good. It turns out that the details aren’t so good on the CDO sale, however. The $30 billion were already written down to $12 billion and they sold then for $6 billion, or about 20 cents on the dollar. Incredibly, these assets are senior to the more junior debt of the CDOs, whose presumed value now must be zero.